Technical characteristics of VoIP
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  • 1. The diffusion of VoIP fosters the process toward the info- communication industry CECERE Grazia1 Abstract The diffusion of VoIP technology enforces the diffusion of the info-communication industry, in other words the “IP based industry”. This industry is characterised by rapid innovation, low barriers to entry and common IP general purpose technology pattern. The VoIP could be applied to any layers. The technology has two many impacts on the telecommunication industry. In terms of industrial dynamics, it is changing the market structure being the vehicle for the new entrants. In terms of knowledge dynamic, it is transforming the telecommunication industry into informatics and multimedia based industry. This process fosters the technological convergence and the convergence of services. Key words: economics of telecommunication, VoIP diffusion, info-communication industry, modularity Introduction 1 Université Paris Sud 11, Laboratoire ADIS, France Joint Supervision University of Torino, Dipartimento “S. Cognetti De Martiis”, Italy Visiting Student University of Sussex, SPRU, United Kingdom 1
  • 2. The telecommunication sector is under the pressures from sector liberalisation and the emergence of the new technologies and new entrants coming from others sectors (Peitz M., Valletti M. V., Wright J., 2004)2. New actors including connecting operators, content producers, browsers and search engines are competing with incumbents. In this complex scenario, VoIP is one of the emerging technologies. This article will deal with the analysis of VoIP (Voice over internet protocol) technology, so-called Internet telephony which supports voice, data and video communication as well as instant messaging. However, this technology originates from the computer networking or data communications technology, VoIP is strongly influencing the telecommunication sector. VoIP could, in principal, replace the traditional public switched network (PSTN), which is in other words the traditional technology employed on the telecommunication sector. VoIP is based on packet switching transmission technology; on the contrary, the PSTN is based on switching circuit. VoIP have different forms of applications, namely, as software (Skype, Yahoo) in form of peer-to-peer system where it needs the access on the internet network, as device applied on the network at the consumers’ level or on the backbone (in Italy FastWeb, in France FREE, in United Kingdom TalkToTalk) and on the wireless environment. New technologies are the engines able to change/transform the industry structures and thus the activities of the firms involved into a knowledge-based industry. Schumpeter defined these “engines” like to be able to offer new goods and services to consumers; to create new methods of production, transportation and new markets and to set up new industrial organisation forms (Chandler, 19903; Fransman, 2003). VoIP is the “engine” coming from the computer industry and strongly challenging the incumbents on the telecommunication industry. Firms involved on VoIP diffusion are “heterogeneous” (David, 1975; Antonelli, 2005) and they operate in a complex dynamic system. The diffusion of VoIP is able to foster the diffusion of new infrastructures, such as the wireless networks; then, VoIP could support the diffusion of new technology and multimedia applications services such as IPTV. In fact, this innovation is changing the telecommunication industry structure and thus the boundaries of the firms involved. The aim of this paper is to contribute on the analysis of industrial dynamic and knowledge dynamic into the telecommunication industry. The article shows this technological change enable dynamic efficiency on the telecommunication sector, as they increase the competition among new entrants and between them and carriers. These changes occur within the constraint of interoperability/ interconnection on the network and modularity among the systems. The article identify two new entrants applying VoIP providers “IP network Voice service” (such as Vonage, Iliad/Free) and “VoIP software- service” (such as Skype, JaJah), both part of the info-communication industry. I recognize some criteria for distinguishing these two main models: network layer, consumers VoIP perceptions, cost of communication, multimedia options and providers’ capabilities. The incumbents have applied the technology without any dynamic capabilities. I consider VoIP a second generation innovation in respect to Internet telephony, as it is based on the packet switching technology, thus I identify the VoIP economic characteristics as follow cumulative, complementary and fungibility innovation (Scotchmer, 2005; Antonelli, 2005). This allows to make huge economies of scope and increasing return. Further, in order to describe the telecommunication industry and its transformation, I use the layer method (Fransman, 2002; Krafft, 2003). This method 2 Ibid. p. 315 3 Ibid. p. 597 2
  • 3. permits both to do static and dynamic approaches. On the one hand, layer method defines the similar capabilities and functionalities of each layer and on the other hand, the dynamic approach helps to define the impact of VoIP (or new technology) on the players’ strategies and evolution. The dynamic process transforms the telecommunication sector into the info-communication industry. According to Fransman (2003), the activities based on the info-communication industries exploit the internet interconnection as common platform. The historical and dynamic diffusion of VoIP innovation involves a complex dynamic system with elements including capabilities, location and “systemic interdependence” (Antonelli, 2005). Firstly, the players have different capabilities and endowments; as they are coming from different sectors. Hence on the supply side, I observe that the diffusion of VoIP has been characterized by the high mobility of people at intra-firms level within the telecommunication industry and from informatics industry to the telecommunication industry. Secondly, firms involved are located in different parts of the world and nevertheless they create a huge network effects among the supply and demand side. Thirdly, elements of the systemic independence arises as VoIP diffusion involves: implications for regulation framework, interdependence between players coming from different sectors and thus the pressures on the incumbents created by this new type of “bypass” of existing telecommunication tariffs. On the consequence, this complex process provides a recombination of intra-firms and inter-firms capabilities. The economic characteristics of the innovation foster the process of convergence which it has been taken place into the telecommunication sector (Aoki K, Ono R., 1998). On the one hand, VoIP fosters the technological convergence as it combines the telecommunications and informatics technology. On the other hand, VoIP has the technical requirement to support different functionalities- convergence of services/ applications, which implies that providers are coming from different sectors and thus they have different capabilities, as engine browsers (for example Yahoo voice). In other words, VoIP is the result of different features, because of the nature of suppliers, the nature of physical/technical supports and the nature of the consumers involved. Furthermore, the VoIP diffusion is based on a great interaction/reaction between suppliers and consumers. These characteristics allow VoIP to have wide range of applications, which would create branching process outcomes; hence non-predetermined further developments, in other words it is possible to assume that the VoIP diffusion is non-ergodic. The section 1 describes the technical characteristics of VoIP in order to differentiate it from former PSTN voice technology underling the modularity technology; the section 2 delves into the analysis of VoIP economical characteristics, such as fungible, cumulative and complementary in respect to internet protocol. Then, the section 3 illustrates the layer model and underlines the key capabilities of each layer, identifying the former firms’ boundaries in term of capabilities and regulation features. Section 4 aims to illustrate the changing of telecommunication industry toward the info-communication industry and hence underling the industrial and knowledge dynamics. 1. Technical characteristics of VoIP 3
  • 4. In this paragraph, I would describe carefully the VoIP technology characteristics compared to PSTN technology. In order to analyse the diffusion of VoIP technology, it is crucial to identify the technical characteristics of this technology, coming from the computer sector, evolving within the info-communication industry. At the industrial economy perspective, VoIP could be considered as substitute of the PSNT communication (De Bijl P.; Peitz M., 2005)4. VoIP does not require a separation of data and voice (Chetty, Blake, McPhie, 20065). The VoIP is based on the technology coming from the computing world, the packet switching technology. This implies an exchange of data into an inter-network. The packet is independently dropped to a host computer to another through a router. Routers are computers (Mackie-Mason J., Varian H.,1997), 6. The data transportation does not need an instantaneous transportation of the packet. In fact, the data could be delivered with some delay, although the quality of the message does not change. This is because of data requiring asynchronous multiplexing, in other words, packets could not arrive to the receiver at the same order as they were sent from the sender. Nevertheless, message will appear/listen on a correct sequence. On the contrary, on the circuit switching system the bits arrive to the destination in the correct sequence (Mason R., 1998)7. In fact, one of the least level functionality so called “universal datagram protocol” of internet protocol implies that packets would be not lost even if there were congestion. This permits also to add new communication functionalities on the network (Gibbens, 2000)8. The packets which could be lost are identified by a number which allows it to be re-sent to the receiver. This technology transforms the “voice from analogue signals to a series of digit”. These digits are bundled into packets before being transmit to receivers (Mason R., 19989, Chetty, Blake, McPhie, 200610). “Voice data packets” are compacted and forwarded over the IP network, each packet contains the destination address. On the contrary, the traditional public switched network- PSTN is based on circuit- switched and it was used on the traditional telecommunication network. The traditional telecommunication network consists on local loops which connect consumers to a “main distribution frames” (De Bijl P.; Peitz M., 2005)11. This network requires that the communication should be transferred instantaneously. The traditional telecommunication networks have implied an equivalent of a cable in order to connect two customers, regardless to communication requirements. The PSTN requires a “fixed share of network resources” (Mackie-Mason J., Varian H., 199712; Laffont J.J, Tirole J, 2002)13. In others words, an “end-to-end circuits” should be previously provided, so a permanent set of network is retained for calling (Mackie-Mason J., H. Varian, 1997)14. One of the main revolutionary implications of VoIP is that VoIP is less costly or completely free (PC-to-PC communication, for unlimited call offered by VoIP players within subscription fees) than the traditional public switched network (PSTN) as the transportation of a bit of information is less costly through the IP Network. With the VoIP 4 Ibid. p. 3 5 Ibid.p.333 6 Ibid. p. 33, 34 7 Ibid.p.936 8 Ibid. p.332 9 Ibid.p.936 10 Ibid.p.333 11 Ibid. p. 4 12 Ibid. p.33 13 Ibid. p. 265 14 Ibid p. 33 4
  • 5. telephony, the marginal costs of a communication are reduced to zero. (Mason R., Valletti T., 200115). The explication is based on technical reason. The VoIP implies about “90% less bandwidth than the PSTN call” (OCDE report, 2006)16. If customer calls from Paris to London, carriers should employ an equivalent of an entire cable only for single communication, which is a waste of resources. But, the performance of the service is guarantee. Within the VoIP network, there are not any wastes of network capacities. Since, packets are sending on the network “via different routers” (Mason R., 1998)17 as within Internet Protocol (Mackie-Mason J., Varian H., 1994)18. Thus, the IP network is better exploited19 than the PSTN. The VoIP technology has essential three applications, notably as software, as technology applied on the telecommunication network or it could be used on the wireless network. As software, the VoIP technology works as a peer-to-peer network, the case in point is Skype. As device, the technology is installed on the physical telecommunication network, so called “VoIP signalling protocols” (Wang L., 2004)20, the technology could be applied to any network supporting the TCP/IP (transmission control protocol). In this case, it has different applications, notably, Phone-to-phone and Phone-to-PC (OECD, 2006)21. VoIP on the wireless networks could be used on the Mobile VoIP and Wireless VoIP network. This new technology does not have geographic limits as the traditional network. There were some examples of useful application of wireless VoIP as happened in South Africa with the service of telemedicine in the rural areas (Chetty M., Blake E., McPhie E., 2006)22. In the past, “unbundling local loop, shared access and wholesaling” (Arcep, 200623; Distaso W., Lupi P., Manenti F. M., 200624) were the exclusive technical-regulatory conditions for entering on the telecommunication market. Nowadays, the new technological development allows new entrants to offer voice service without access to the traditional wire-line network, for instance “IP network voice” operators (Baranes E., Bourreau M, 200525; De Bijl P., Peitz M., 200526). Nowadays, more generally, the voice service could be offer through these network alternatives: copper cable, Digital subscriber line, cable modem, optical fibber, Internet protocol, Satellite, Wireless technologies and Power line communication (Yoon S.H., Yoon M. G., Lee J., 200527; Distaso W., Lupi P., Manenti F. M., 200628). Modularity An important technical and economical characteristic of this technology is the modularity. More generally, the ICT technologies have been developed within a modularity system. 15 Ibid. p. 2 16 Ibid. p. 12 17 Ibid.p.936 18 Ibid.p.29 19 These information are based on the interview with M. Pierre Pebay 20 Ibid. p.77 21 Ibid. p. 9,10 22 Ibid. p. 337 23 Ibid. p.19 24 Ibid. p.89 25 Ibid. p. 13 26 Ibid. p. 3 27 Ibid. p. 450 28 Ibid. p. 90 5
  • 6. This implies that the production of products/services/technologies is separated into modules, each module is dedicated to a particular application or technology, nevertheless the modules should be compatible and interoperable (Baldwin Y. C., Clark K. B., 1997, Fransman, 2002b). A modular system allows to construct complex products where each module is construct independently to the others and thus it could be improved and modified, within the conditions to be interoperable and interconnected (Baldwin, Clark, 1997)29. Thus, the modules are joined into a common “platform”. Modularity could be considered as both “knowledge and industrial structures” allowing to distribute knowledge and competences (Steinmuller, 2005)30. Since, module producers’ should have knowledge on their modules and on the correlated/linked modules. These characteristics are important for fostering the convergence process, because the technology is able to work with different technologies/applications and across the different layers. More generally, the info-communication industry has been developed within a modular system, where each layer has been built and improved as a module. The modules have been produced by different companies and nowadays more often modules are producing by the same companies. Whether, we consider VoIP as a module, we could consider the technology such as transmission technology able to offer the voice service. This technology is an open standard which is interoperable and interconnected. 2. Analysis of VoIP economical characteristics Within the evolutionary economy, general purpose innovations have been considered as basic innovations or new paradigms which are able to create new goods and services. The generic innovations could have applications on different sectors (examples are integrated circuits and biotechnologies) (Rosenberg, 199431, 2000)32. They disclose new opportunities without giving direct outcomes; examples are the application of biotechnologies in a wide range of sector or the development of the micro-electronic. Whether innovations are incremental, they spread fundamental knowledge (Verspagen, 2007)33. The application of general purpose technologies required complementary innovations which generate technological dynamics. These characteristics foster the formation of increasing return (Arthur, 1989, Bresnahan, Trajtenberg, 1995)34 and thus generate dynamic efficiency. The diffusion of VoIP is able to create new fields of technological possibilities, which create new disciplines. It was the case for electrical and chemical engineers (Rosenberger, 1994)35. In fact, the application of general purpose technology to different sectors could be considered as an “innovative activity” (Chandler, 199036; Bresnahan, Trajtenberg, 199537). It is difficult to define the boundaries of applications and thus the boundaries of the industry involved on the general purpose technology applications. 29 Ibid. p. 84 30 Ibid. p. 5 31 Ibid. p. 144 32 Ibid. p. 80 33 Ibid. p. 56 34 Dans cet article, l’auteur ne fait pas référence au problème d’appropriation des droits relatifs à l’exploitation d’une innovation générique, car la VoIP est un standard ouvert et donc pour l’instant dans le marché on ne voit pas apparaître des controverses. Ibid. p. 84 35 Ibid. p. 144 36 Ibid. p. 25 37 Ibid. p. 88 6
  • 7. The VoIP technology is coming from the internet protocol defined as a general purpose technology. The informatics/computer industry has a “history of sequential innovation” based on IP technology (Scotchmer, 2005) 38. Thus, we could assume that Internet is a “generic technology” which encourages the creation of new technology and new services. Thus, Internet encourages new users’ needs/behaviours (Mowery, D.C., and T.S. Simcoe, 2002)39. General purpose technology customers are accustomed to the technology and applications, as happened on the first stage of the computer manufacturers’ development (Steinmuller, 2006)40 . Thus, computers and internet protocol users build informatics/e- skills capabilities through learning by doing process. Moreover, Internet might create the possibility of “radical shift of technology” (Laestadius S., 1998)41. More generally, the internet has created the condition for shaping new innovations and some features are defined as “killer application” (Economides, 2002; Mowery D.C., and T.S. Simcoe, 2002)42 as the music downloading (Economides, 2002)43 and VoIP. As argued previously, VoIP is a technology coming from the computer industry, it is not the only new technology influencing the telecommunication industries, others alternative technologies are having great impact on the telecommunication sector examples are WiFi (802.11X), WiMax (802.16) and Mobile-Fi (802.20) (Fransman, 2006)44. The VoIP technology has some characteristics of knowledge, for instance indivisibility, cumulative, fungibility and compositeness in respect to the internet protocol. On the one hand, this has important implications for explaining the structure of the industry; on the other hand, it has important implications at the policy level, because the diffusion of VoIP could foster the widespread of broadband45. These concepts are based on the general assumption that knowledge is indivisible as it is based on previously background. The indivisibility characteristic leads to the fact that VoIP technology is based on the Internet Protocol/packet switching. It is not possible to dissociate the IP technology into the VoIP. The cumulative means that the innovation is based on a technology existing previously. A cumulative technology is built on the former technology (Scotchmer, 2005; Antonelli, 2005)46. According to Scotchmer (2005), there are three kinds of cumulative innovations. Firstly, the first generation innovation, called “basic innovation”, generates many second generation innovations. This is the case in point for VoIP technology (as well as in regard to Internet protocol and multimedia sector), the first generation innovation could be the Internet Protocol; the second generation is VoIP47. Secondly, the “second generation innovation” (so called the research tools model) entails many different “first generation” innovations. Thirdly, the second generation innovation 38 Ibid. p. 147 39 Ibid. p.1369 40 Ibid. p. 217 41 Ibid. p. 392, 393; in his article Laestadius argues that biotechnology technologies are a generic technology, in my point internet has the same characteristics if it is taken in consideration the VoIP as a technology based on the IP protocol. 42 Ibid. p. 1378 43 Ibid. p.208 44 Ibid. p.43 45 Both the OCDE and the European Commission are fostering the VoIP diffusion for ensuring the broadband and thus the ICT among the consumers. 46 Ibid. p.17 47 Ibid. p. 141 7
  • 8. improves the “first-generation innovations” (Scotchmer, 2005)48. The cumulativeness implies that VoIP is vehicle of broadband diffusion as it could be not dissociated to any kinds of VoIP applications. Then, VoIP has the characteristics of fungibility, which implies that the technology has a wide range of applications. Hence, the VoIP could be used in a different contest/applications as previously indicated, for instance to PC-to-PC communication or to PC to traditional networks. Moreover, VoIP could be exploited as a platform for developing further applications: video, video games, instant messaging, sending short message, tele-medicine, communication on the wireless environment and IPTV and so forth. Even more, it could be defined also a composite innovation. Since, VoIP is the outcome of IP technology applied to the telecommunication sector (Antonelli, 2005)49. Those characteristics have an important impact on the diffusion of this innovation, which came from the informatics sectors and it has main application and influence in the telecommunication sectors. On the one hand, the informatics operators which diffuse massively this innovation are entering on the telecommunication market. On the other hand, the telecommunication operators, who would like to adopt this technology, have to widen their competences. Hence, carriers have to restructure their business models since they are seeing to reduce the receipts gained from the subscription fees which are becoming useless. The analysis of VoIP implies a dynamic capability approach. The VoIP creation/ diffusion could also define as a “creative accumulation” process (Pavitt, 1984)50. Table 1: The economics characteristics of VoIP as convergence explanation Technological convergence Convergence of (telecommunication/internet) Service/application (voice+ value added services) VoIP software Cumulative Fungible (voice send on the internet network) (more internet based applications are possible ) IP network voice Cumulative Competitiveness providers (applied to the TCP/IP network)) (the merger/combination of voice and value added service) The economic characteristic of technology justifies the convergence process behind the evolution of this technology. Table 1 underlines the relationship among the economics characteristics and the convergence process for each model. This approach justifies the entrance of new operators technological localized close to the general purpose technology. As the competences required are complementary and incremental in respect to the IP technology. This process could generate creative accumulation of competencies (Pavitt, 1984)51. 3. Layers methods for VoIP functionalities understanding 48 Ibid. p. 144,145, 146 49 Ibid. p.17 50 Ibid. p. 151 51 Ibid. p. 151 8
  • 9. In order to identify the changing in the telecommunication industry, it is crucial to refer to the evolution industry framework. The industrial evolution analyses how economical activities are divided among firms and which are the core characteristics of those firms (Krafft, 2003); allowing static and dynamic analysis. Technical changes occur in the telecommunication sector are not easily understandable without a conscious analysis of the status quo in terms of capabilities and functionalities of each layers. En fact, knowing the structure of the industry enables to identify the “dynamic efficiency thought innovation and entrepreneurship” (David, 2000)52. In order to identify the influence of VoIP technology in the sector, it will be useful to employ the layer framework method (Fransman, 2002b). The layer method permits to identify the “evolving structure” of telecommunication industry from static and dynamic perspectives (Fransman, 2002; Krafft, 2003). The analysis of layer permits to separate and identify the different functions within the telecommunication sector in respect to the capabilities and the functionalities of each layer. This method underlines the origins and the evolution of the telecommunication sector. Using, layer method for VoIP study; it is useful for understanding the impact of the technology into each segment of the telecommunication industry/network how it could foster the convergence process. Internet telephony might push the process toward the convergence between layers and the establishment of the so called “Info-communication industry” which is created and developed on the internet interconnection network. The layer model implies a distinction between the different stages of the telecommunication industry. Fransman has identified six layers (see table 2). The first layer -equipment and software production concerns producers of devices and software as switching, routers and so forth. With the second layer, they constitute the essential physical equipments. The second layer- network/transmission had included traditionally incumbents and internet providers. Within this layer, operators provide the physical infrastructures between consumers, in other word they built the end-to-end service. The third layer – connectivity involves the activity of offering Internet access on the backbone. The recent technological development has added facilities-less operators to the traditional facilities- based operators. The fourth layer- navigation and middleware operators includes browsers and search engines. According to Rallet and Lequeux (2002), this intermediary model could be defined as Google model. In other words, this is based on the intermediation between the huge amount of information on the web network and the consumers’ needs. The fifth layer- contents and packaging develops the content offered on the Internet network (Fransman, 2002b). Finally, the sixth layer- consumers are considered as part of the telecommunication industry. The VoIP could be applied by all layers. Indeed, each layer could be used as switching centre (The Economist, 2001a). This show how it is complex the analysis of the technology diffusion and applications. Table 2 : Layer method Layer Activities Firms 53 V Application layer and content diffusion/production Ebay, iTunes, Myspace, VirginMega IV Navigation (browers engines, electronic payment Google, Yahoo, security) 52 Ibid. p. 9 53 The author of this article updates the in formations. 9
  • 10. III End-to-end connectivity (email, VoIP) Skype, PayPal (ISP-internet service providers et ASP- service accès providers) II Network transmission (optical fiber, ADSL, cable, Opérateurs historiques plus les wireless -Wifi, Wimax) nouveaux entrants ayant un réseau I Equipments and software (trasmission equipments, Alcatel/Lucent, Cisco, Nortel switches) Source: Fransman (2002b)54 ; Fransman, Krafft, (2002) The process of convergence takes place within the different layer55/activities in the telecommunication sector (Fransman, 2002a) thus at the level of intra-layers and of inter- layers. Basically, VoIP was shaped to transmit voice via the packet switching technology. This primary function of VoIP was on the third layer. Technological convergence and service convergence require a combination of new and different capabilities (knowledge dynamic) and they allow new entrance on the market (industrial dynamic) - see table 3. Table 3 : Convergence entre les mêmes couches et entre différents couches Firms Former layer Layers occupied today Google et Yahoo IV –navigation middleware IV – search engines III – VoIP and email service V - Information, translation.. Microsoft I- operating system I- operating system and software III - VoIP V – music and video diffusion Skype V- kazaa inventors (music II – wireless service downloading) III- VoIP IV- games, number telephone searching56 Free II – internet providers and II- physical and wireless internet network connections III- email service IV- search engines V – video diffusion Technological convergence implies that different industries share the same technological capabilities. More generally, this technological convergence is encouraged by the emergence of generic purpose technologies (Gambardella, Torrisi, 1998)57. According to Gambardella and Torrisi (1998), the technological convergence does not imply itself the convergence at branding level. The main objective should be to add business capabilities in order to find “value network”. On the telecommunication sector, VoIP could foster the process of multimedia convergence (Ahuja, S. R., & Ensor, R., 2004)58. The firms adopting VoIP should add to their core activities new services in order to find new valuable network of distribution. 54 Ibid. p. 475 55 Layers are the module in which the telecommunication activities could be divided from the consumers to the equipment layers. 56 Les fournisseurs de Skype ont développé un service de télévision en ligne appelé Joost, qui va ainsi les colloquer à nouveau dans la couche cinq. 57 Ibid. p. 445,446 58 Ibid. p. 53 10
  • 11. The technological convergence as happened on VoIP case, built the technical requirements which allow firms to increase and diversify the range of products/services offered to their consumers. The increased diversification would allow to the enterprises involved staying competitive on the market (Penrose, 1959)59. Thus, diversifications in business activities require a large spectrum of information about the consumers’ expectation and willingness to pay (Shapiro and Varian, 1999). In my paper, I showed that the carriers might adapt their core activities as they have the information about users’ needs and behaviours, so they could arrange their competencies in order to face the consumers’ requirements. Thus, the combination of VoIP and internet diffusion and the combination of voice with others value added services would create the necessary economics of scale and scope (Maeda and el., 2006), already showed by the technical and economical feasibilities of wireless -VoIP converging within a common network. More generally, telecommunication sector is based on economies of scale and economies of scope (Davies, 1996)60. Economies of scale arise from the improvement of the production and thus from the huge augmentation of outputs. In the telecommunication sector, the new technologies allow to increase the bandwidth and the quality of the service as happened with the internet telephony. On the one hand, firms involve in economies of scope undertaken different activities, in order “to produce multiple outputs”, they exploit the same plant to produce different products. From a theoretical point of view, firms are considered as a compound of resources and capabilities (Penrose, 1959). Firms perform their activities, if they could exploit them. Thus, sharing inputs in order to produce multiple outputs is considered as to be efficient; in this case inputs could be tangible and intangible (like skills and management). In other words, the convergence process between service/layer brings economies of scope (Houghton J. W. 1999)61. En fact, wire and wireless network offer multiple services to the consumers (Banker, Chang, Majumdar, 1998)62. 4. Toward the info-communication industry The info-communication industry also called IP-oriented industry is distinguished from the old telecommunication industry. Technically speaking, the old telecommunication industry used “low-cost terminals connected to the extensive central equipment located in the telephone switching station”. On the contrary, into the info-communication industry the increase quality of processing capabilities and computer reduction prices allow to afford “processing power at the terminal instead of the network side” (Maeda al, 2006)63. Thus, in the info-communication the innovation system is opened, which increases the rate of innovation creation. The info-communication industry uses Internet as a common general purpose technology (Fransman, 2003); Internet network is an open standard, non- proprietary standard thus, it constitutes the platform for creating and adding furthers innovations and applications, which encourages competitive entry compared to the old telecommunication industry (Maeda al, 2006)64. There are many examples of companies and services distributed on Internet, such as Skype, Linux (open software), Napster, Google and so forth. 59 Ibid. p. 107 60 Ibid. p. 1145 61 Ibid. p. 694 62 Ibid. p. 253,261,271 63 Ibid. p.594 64 Ibid. p. 594 11
  • 12. Table: 4 Info-communication industry vs. old telecommunication industry Info-communication industry Old telecommunication industry Open innovation system Closed innovation system Low barriers to entry High barriers to entry Many innovations Few innovations Based on general purpose technology Fragmented Knowledge based Innovation incentive – new technologies Medium-powered incentives and applications Rapid, concurrent, innovation Slow, sequential, innovation Source: Fransman, 2003 The diffusion of information and communication technology has influenced all sectors. Economy is became essentially information-based (Houghton, 1999)65 or knowledge based. As well as in other sectors, technological development has transformed radically the telecommunication sector. Thus, it has been transformed from facilities-based industry into facilities-less industry (Krafft J., 2004)66 as happened with the wireless technology. The facilities-less service providers could work without access to the layers 2, so called network layer (Fransman, 2003). Thus, the intelligence of the network is on computers and many infrastructures have becoming wireless. The VoIP technology follows this technology pattern. Nevertheless, it is important to underline that the VoIP as PC-to-PC communication required interconnection access and complete interoperability on the internet network; hence, the PC-to-PC internet telephony could be defined as facility dependent. Until when the software company as Skype might propose their networks. These changes demonstrate (table 4) that the technology is changing the knowledge dynamics of the industry of the telecommunication as well as increasing the industrial dynamics. VoIP into could be used without the support of the traditional wire-line networks. These facilities less-operators are vertically concentrated (Fransman, 2003). Vertical integration arises when different capabilities are required to produce/offer a service, then the players should combine to their own capabilities to other complementary activities/capabilities, in vertical-related subsystem which foster convergence process (Gaffard, Krafft, 2000) in terms of competences requirements and value added products or services. Thus in VoIP application, the layer could converge for example the layers 4 –search engines and browsers offering voice service as Yahoo voice- have the same functionalities of the layer 2- network layer. The table 3 shows some examples of info-communication firms and how they recombine their capabilities toward the vertical integration. VoIP foster the process toward the info-communication which is a demand driven industry as their willingness to pay for telecommunication and information services is crucial into industries’ strategies (Krafft, 2003). Whether, we consider the policy implications the consumers’ adoption of the technology will massively foster the diffusion of broadband connection around Europe. 5. Internet telephony evolution 65 Ibid. p. 694 66 Ibid p.11 and 15 12
  • 13. “New entrants made their challenge on the back of new technologies” within a high technology based market (Fransman, 2006) 67. More generally, it is crucial to underline that innovation is the core of a “dynamics basis for competition” (Metcalfe, J. S. 1994) 68. For example, Microsoft and Intel (new entrants) ushered in the software, semiconductors and computing industries replacing IBM, the previous incumbents (Fransman, 2006)69. If we consider the VoIP market, new entrants are successfully challenging the incumbents (telecommunication carriers) because consumers are churning. Two main models of new entrants adopting VoIP are identified: “IP network Voice service” and “VoIP software- service” providers. The two main models of VoIP providers have been demonstrated to have dynamic capabilities (Teece al., 1997) applying the technology with creativity. This has fostered the knowledge dynamic of the industry. “IP network Voice service” providers are Internet Service Providers (ISP) exploiting their internet network to offer VoIP to consumers offering free call and other bundling services, examples are Iliade/ Free, Vonage, FastWeb. These operators have appeared on the market between 1999 and 2001. For these players VoIP could be considered as a substitute (Rosenberger, 1982) of the traditional PSTN. “VoIP software- service” allows communication PC-to-PC, thus the communication is made thanks to free software downloading, such as Skype, Yahoo voice messenger (who bought Dialpad) and Google Talk-to-Talk. These appeared on the market among 2002 and 2003. For, “VoIP software- service”, VoIP presents the layer 1 of interconnection. For categorizing the two models of VoIP adoption, I distinguish some criteria (table 5) such as: network layer, providers’ capabilities, costs of communication, multimedia options and consumers VoIP perceptions. Those criteria are the result of above analysis. The network layer is crucial as it is strictly linked to the regulation policy and the technological development. IP network providers benefit from the telecommunication sector liberation (unbundling line, line sharing, bit-stream access, sub-loop unbundling) and the diffusion of new network technologies (Cable, Power line, Wifi, Wimax and so forth). Whereas, VoIP software providers exploit the bandwidth of the internet connection, they are facility dependent. The consumers’ perception of the technology adoption is irrelevant on the IP network providers; while on the contrary consumers of VoIP software providers have to download the software or have access to the software. This is important as the consumers in any cases have access to free call (PC-to-PC; unlimited landline calls); while incumbents’ consumers are still paying “facture à la consummation” or they could have unlimited calls but reduced to the national level. Table 5: CRITERIA for categorizing IP network voice service and Voice software- service 67 Ibid. p. 42 68 Ibid. p. 932 69 Ibid. p. 43 13
  • 14. Network Providers’ Cost of Multimedia Consumers layer Capabilities communicati options VoIP (layer 2) on perceptions IP Internet Connectivity Subscription Bundle triple play No different netwo service layer fees service (video) perceptions rk providers capabilities (unlimited voice calls) servic e Voice Exploit the Navigation & PC-to-PC Video Consumers softw bandwidth middleware :free conferencing, download the are- of internet layer and the PC-to-phone: sending file software and servic network application extremely use handset for e layers cheap70 communication In terms of capabilities, IP network voice service providers have already the physical network and the consumers’ portfolio, as they offered internet access. Voice software- service providers have competences in informatics industry. Search engines such as Yahoo have been already the intermediation functionalities between the users and the internet network, even if they acquired Dialpad, a Korean VoIP software company VoIP in form of PC-to-PC is a value-added service to their consumers. Informatics sector players have capabilities in shaping software and IP languages useful for the VoIP configuration of gateways and switchers. The incumbents started to massively invest into VoIP technology with the aim to enforce their network capacity and to reduce the maintenance cost on the supply side, which did not benefit directly the consumers. Thus, they adopt the technology without any creative reactivity capabilities. Their innovation process had been shaped in a given architecture of the system, new knowledge is fitted into this architecture. They have employed VoIP technology on their networks, considering VoIP as an incremental innovation in respect to their networks. They did not offer new services and reduced price for calling, thus their consumers did not benefit from the technology application. The carriers’ strategy has reduced the welfare of the consumers. For example, incumbents such as Telecom Italia (in 2002) and BT employed VoIP on their network in order to reinforce and reduce the cost of the communication at the supply side but not on the demand side (The Economist, 2006) 71. The traditional PSTN Telecom Italia's network had 66 national transit switches, thank to IP network it will have 24 exchanges. Each node was connected with a specific link to other node, thus each node had 65 connections. The IP backbone permits to reduce the number connection from 2000 to 24 (Financial Times, 2002)72. These reduced costs of maintenance have not reduced the cost for consumers’ calls. 70 Skype Pro offers now PC-to-Phone free calls with a subscription fees. 71 The Economist (2006), The end of the line, Oct 14, Vol.381 p.10 72 Financial Times (2002), Rolling out the future: Telecommunication: In Italy much of the voice traffic has joined data through the same network, Oct 9,pg. 14 14
  • 15. On the contrary, new entrants’ consumers have perceived the technology as an increase of welfare. Since, new entrants offered free unlimited and cheaper price calls. Some carriers have offered the unlimited landline calls limited to national calls or with time restriction on the day. Incumbents have not been able to adapt their activities and strategies to the new technology (they did not follow the new path).On the one hand, they have applied the technology as a cumulative innovation to their physical network, without offering new customers’ options and thus reducing the price of communications. In fact, the costumers’ perception is a major criterion for categorizing the new entrants. On the other hand, they offered a less competitive offer then the “IP network service” and the “Software service” providers. Conclusion As underlined, VoIP is an open standard; it is reducing the barriers to entry, increasing the innovation speed and constituting the platform for further innovations. These characteristics foster the transformation towards the info-communication industry based upon the exploitation of internet. The new entrants on the telecommunication industry have been shaped and applied VoIP through learning by doing/trial process within a decreasing barrier to entry and to operate. These characteristics permit to generate non- ergodic branching process. The players involved have been applying and shaping VoIP within a sequence of “localised innovations” (David, 1975). Two main model of VoIP applications are identified IP network voice service providers; Voice software-service. The activities of these operators are based upon technological convergence and convergence of services. Thus, changes have consequences on the industrial dynamics as new entrants are on the market and on the knowledge dynamics because the capabilities required for being on the market are changing. The incumbents have applied the technology without any dynamic capabilities and without proposing new services and reduced price to their consumers. This shows that the dynamic of innovation adoption increase the welfare. As this technology has this technology has cumulative and indivisible in respect to the IP and broadband technology, the diffusion of VoIP fosters the widespread of the internet connection and ICT technologies. Bibliography Ahuja, S. R., & Ensor, R. (2004), VoIP: What is it good for? Queue, 2(6), 48–55 Antonelli, C. (2005), Models of knowledge and systems of governance, Journal of Institutional Economics 1, 51-73 Arthur, B. (1989), Competing technologies increasing returns and lock-in by small historical events, Economic Journal 99, 116-131 15
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